With the cooling of global housing markets, these are warning signs that need to be heeded in the United Kingdom

With the cooling of global housing markets, these are warning signs that need to be heeded in the United Kingdom

This is Armchair Economics with Hamish McRae, a newsletter for subscribers only from i. If you would like to receive it directly to your inbox every week, you can sign up here.

The switch is brutal. Markets around the world are moving from seller markets, where prices seem to be rising, to buyer markets, where they are starting to fall. You can see it quite dramatically at the price of American high-tech giants. Since the beginning of this year, Tesla’s share price has dropped by almost half, so while its CEO Elon Musk is still the richest man in the world. Bloomberg according to the world’s billionaires, it is now worth “only” $ 193 billion, which is almost $ 80 billion less than since the beginning of January. The share price of some other high-tech companies, such as Netflix, has fallen even more.

We do not have such a problem on this side of the Atlantic. This is partly because the richest British are well down the league table. Our best contribution, Sir James Dyson, is in 118th place with $ 14.2 billion. But it’s also because we haven’t seen such a huge rise in stock prices as they did in America.

From a British point of view, then, the hot question is not what can happen to the shares of Tesla, Apple or Amazon. The question is whether a similar change is beginning to take place in our housing market. The answer at the moment is no. As this document reported this week, the average asking price for a house reached a record high in May at £ 367,501, a jump of £ 7,400 in a single month.

Global image

But look around the world and a very different picture emerges, as some of the hottest real estate markets have suddenly become very cold. In Canada, house prices fell six percent in April, the second month in a row. In Australia, mood from home buyers has collapsed to its lowest level since 2008, and Australia’s Westpac Bank said: rate tightening cycle. ”

And in the US? Well, while there has been no overall decline and prices are still at record levels, new home sales have fallen to a two-year low as growing interests begin to bite. Last fall, the 30-year mortgage was about 2.75 percent. It is now 5.25 percent. Unsurprisingly, there are a number of comments, such as Atlantic magazine, indicating that the peak has indeed been reached. Google home search is now down almost 10 percent from a year earlier, another signal of a change in market sentiment.

Three reasons not to panic

Return to the UK. Concerns that rising interest rates here could lead to falling prices, the Nationwide Building Society, the country’s second-largest provider of housing loans, said last week. This warning needs to be taken seriously, but I suggest that there are three reasons why the market is likely to become ‘normal’ with more or less stable prices, rather than where sellers are panicking because no one will. make an offer.

The first is that the basic laws of supply and demand still apply. The supply is limited partly by planning inspections and partly because the annual level of house construction is low compared to the stock of houses. We build around 160,000 houses a year, for a total of about 29 million houses. In terms of demand, the government expects the UK population to grow from 67.1 million in mid-2020 to 69.2 million in mid-2030 and to 71 million by 2045. The overall demand for homes therefore looks safe.

Second, interest rates will rise – we all know that – but I have not seen any suggestions that they have reached the extreme levels they reached in the 1970s and 1980s.

And third, wages are rising relatively fast now because they have to help working people cope with rising prices. The annual growth of total wages is already 5.4 percent higher than last year and will almost certainly continue to increase. Rising profits will bring property prices in line with what people can afford, making homes accessible again for three or four years of stable prices.

One key signal to monitor

But – and this is the key point – markets can change very quickly. Do you remember those nasty words, staring and staring? The first was when people accepted one word of mouth and then returned to the deal and sold it to someone with a higher.

The second was when the buyer abandoned his offer just before the sale. If people suddenly start leaving their offers, it will be a signal that the markets have really changed.

Other thoughts

US stock prices picked up slightly yesterday at the start of trading, and if it persists, Elon Musk will be a few billion richer than it was on Tuesday night. While it’s a little ridiculous to pay attention to such shifts in wealth day by day, the big question behind it is whether the wealth that seemed to be created by the rise in value over the past year of high-tech enterprises, cryptocurrencies, and the like really exists.

Take the value of Apple. At the beginning of January, it had a market capitalization of $ 3 trillion, which is the first to reach this benchmark. It is now worth approximately $ 2.27 trillion. That’s still enormous, but what happened to the lost $ 730 billion? where did it go?

Internal and external value

It’s worth asking this question, because at least Apple is a real company that makes the products and services that people want. There is something. It is profitable and shareholders receive a flow of dividends. In a few years, it may be worth $ 1 trillion or it may be worth $ 10 trillion, but we can all be pretty sure it will cost something. There is an intrinsic value – the value itself. It is worth reading to define the intrinsic value.

In contrast, cryptocurrencies have no intrinsic value because there is nothing there. But they have an external value, a value that exists because someone attributes that value to them. There is nothing wrong with external value. If the image provides pleasure, this form of value is very welcome. If work provides a sense of self-worth, other than a paycheck, then it has another and welcome external value. But I’m afraid people confuse these two things and don’t realize that one kind of value is more fragile than the other.

Andrew Bailey is right about the cryptocurrencies

Andrew Bailey, the governor of the Bank of England, recently grabbed a stick for his inability to control inflation, but I would support him by making it clear that cryptocurrencies have no intrinsic value – which he said over the weekend.

So my concern is not with houses, stocks and real assets like this. These are assets that are valuable only because people attribute value to them. I’m afraid unpleasant surprises await us.

My new book on the future of the world economy, an excerpt of which you can read, is available here. I welcome your feedback on this.

This is Armchair Economics with Hamish McRae, a newsletter for subscribers only from i. If you would like to receive it directly to your inbox every week, you can sign up here.

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